It is time for us to check in on Gold and to note that whilst it is up just under 15% over the past year at US $1850 for the February futures contract it has hit a bit of a slump recently. Only a few days ago it was above US $1950 and back in early August last year it went as high as US $2089. One way of looking at things was expressed by Peter Schiff a few days ago.
To the extent that Bitcoin is actually taking any demand away from gold, that’s making Fed governors extremely happy. A rising #gold price is what central bankers fear most. #Bitcoin is their best friend, which may explain why regulators aren’t in a hurry to help pop the bubble.
Actually central banks which have substantial gold reserves will be pleased and Bitcoin is far from their best friend. But the issue of Gold being replaced as a “safe haven” by Bitcoin is a live one as the tweet below indicates.
Even JPMorgan Chase has acknowledged that Bitcoin is taking market share from gold, the traditional haven asset. On Friday, one Bitcoin was worth more than 22 ounces of gold, which represents a new all-time high. ( @Cointelegraph)
In an article they went further.
According to multiple experts, one possible reason for Bitcoin’s remarkable recent price rise are massive investor outflows from another popular inflation hedge: gold.
Spot gold swooned over the past week, falling 4.62% to $1,857. The asset previously had been surging in unison with Bitcoin, which is up over 40% from $28,000 lows last week.
That narrative has had better Sunday nights and Monday mornings with Bitcoin some US $5800 lower at US $35,000 as I type this. But there is still some food for thought on the piece below.
The moves could be a sign of Bitcoin’s rising status as a legitimate asset class. Gold and Bitcoin have long been linked as both are seen as a way to protect wealth against inflation and macroeconomic uncertainty, but if the price movements over the last week are any indication, however, Bitcoin may be winning the narrative race.
The bull case for Gold
The macroeconomic uncertainty one is so clear we need spend little time with that but the inflation one is quite complex. It opens quite easily and as we recall my subject of Friday and this from Andrew Hauser of the Bank of England.
Since March of last year, G10 central bank balance sheets have risen by over $8 trillion.
In theoretical terms that should lead to inflation and a case for Gold but not so far.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in November on a seasonally adjusted basis after being unchanged in October,
the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment. ( US BLS)
That seems likely to rise as we note a Brent Crude Oil price of around US $55 and the general outlook has led to this.
US Inflation Expectations (10-yr breakevens) continue their vertical ascent, now above 2% for the first time since November 2018. ( @charliebilello )
I counsel caution on the issue of inflation breakevens which are unreliable but the broad trend is useful. There is also the additional issue that official inflation measures are designed to avoid the areas where inflation is both most likely and most rampant.
House prices rose nationwide in October, up 1.5 percent from the previous month, according to the latest Federal Housing Finance Agency House Price Index (FHFA HPI®). House prices rose 10.2 percent from October 2019 to October 2020. The previously reported 1.7 percent price change for September 2020 remained unchanged.
Here we find that there has been a strong case for Gold with uncertainty extremely high and evidence of asset price inflation all around us. I could go further and look at the rise in the price of some equities such as the FAANGs and of course Tesla. Then there is the issue of the way bond prices have soared.
Also the example of the problems in Zimbabwe raise the issue of the supply of Gold.
HARARE (Reuters) – Gold sales to Zimbabwe’s sole buyer and exporter of bullion Fidelity Printers and Refiners (FPR) fell 31% to 19 tonnes last year after lower deliveries from small-scale miners, official data showed on Monday.
FPR pays U.S. dollars in cash to small-scale gold miners, but a shortage of hard cash caused delays in payments most of last year. That forced many of the miners to sell their gold to illegal buyers, industry officials say.
Deliveries of gold, the top foreign currency earner, have been on the decline since reaching a record 33.2 tonnes 2018, mainly due to delays by FPR in paying miners.
The Bear Case
One factor would be a turn in the trend for the US Dollar and maybe we are seeing that as recently it has regained a little of its losses. But underneath that I think there is a bigger factor in that we have seen something of a shift in US interest-rates. I do not mean the official US Federal Reserve one which remains around 0.1% I mean this.
US 10Y yield is 17bp higher on the week ahead of the Dec jobs report, having done this:
Jan 7 +4.4bp
Jan 6 +8.1bp
Jan 5 +4.2bp ( @business)
The ten-year yield in the US is now 1.11% and whilst that is low in historical terms it is up quite a bit since the 0.5% or so of last March. Also it is taking place in spite of the fact that the US Federal Reserve is buying some US $120 billion of bonds of which 2/3rds are Treasuries each month.
From Gold’s point of view there is no some sort of cost of carry albeit not much as we find ourselves in a bit of a twilight zone. If you look at the inflation trend and expectations then bond yields should go higher, but the counterpoint is whether the US Federal Reserve would then increase its purchasing rate. Indeed it could implement a type of Yield Curve Control and we are at yields where some have expected this to be deployed.
Comment
As you can see from the points above the Gold price is at something of a nexus point and one road is rather familiar.
Hello darkness, my old friend
I’ve come to talk with you again ( Paul Simon)
On it we are back to the central banks being in control again as it would involve even larger purchases of US government debt by the US Federal Reserve. That would certainly be convenient considering the fiscal plans.
Biden has called the current USD 600 round of cash a “down payment,” and early last week he said USD 2,000 checks would go out “immediately” if his party took control of both houses of Congress. ( Financial Express).
So in a type of ultimate irony the US Federal Reserve now has its hand on the tiller of prospects for the Gold price and we are back to Friday’s theme of central banks being our new overlords.
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hello Shaun,
re: “A rising #gold price is what central bankers fear most. #Bitcoin is their best friend, which may explain why regulators aren’t in a hurry to help pop the bubble.”
never believe anything until its officially denied ….
so the intention is to pop the bitcoin ” bubble” , like Cyprus I suspect it’s going to be political and to try and catch the Russians with their pants down .
One thing I’d agree with the Gold bugs is that if you have gold coins/bars in your posession they have to send in the soldiers to get it back unlike Crypto currencies in which it just needs a key click……
an old favorate from South Park ….
Forbin
Nice one Forbin…you are quite correct about Bitcoin, how valuable is it when the internet stops or the power stops… get ready this week.
Central bankers & their political “courtesans” know full well that they are destroying currencies; TPTB are likely to be taters deep in bitcoin.
On the crypto currency front the FCA have just issues a grim warning investors/speculators can lose the lot and they have no underlying tangible asset value which I have said previously:
https://www.bbc.co.uk/news/business-55615514
The banks and FCA should have acted earlier however and made the cryptro currencies illegal its all smoke and mirrors and has allowed money laundering and an ability to hide drug money.
I cannot understand why the authorities and governments have allowed these cryptocurrencies to carry on myself. They are causing an unstable financial system which was already unstable before they arrived.
Peter,
You point out that cryptocurrencies have no underlying tangible value, could you please outline what sterling is backed by and what its tangible value is?
“I cannot understand why the authorities and governments have allowed these cryptocurrencies to carry on myself. ”
How many times has HSBC been fined by regulators for laundering drug cartels money and manipulating the price of gold??And yet they have been allowed to carry on in business, I don’t recall any posts by you demanding the governments and regulators prosecute directors of HSBC and send them to prison, did I miss them?Why aren’t you questioning why the government and regulators ave allowed them to continue in business?
“They are causing an unstable financial system which was already unstable before they arrived.”
Do you think central bankers creating billions and trillions of currency units at the click of a mouse and buying their own government bonds and indirectly monetising their spending is causing instability? If so why aren’t you criticicising it?
kevin,
To answer some of your questions:
1.”You point out that cryptocurrencies have no underlying tangible value, could you please outline what sterling is backed by and what its tangible value is?”
A £50 note is guaranteed by the BOE today tomorrow and as long as you can see into the future, a bitcoin isn’t. This is a tangible value with the BOE backing.
2.”How many times has HSBC been fined by regulators for laundering drug cartels money and manipulating the price of gold??And yet they have been allowed to carry on in business, I don’t recall any posts by you demanding the governments and regulators prosecute directors of HSBC and send them to prison, did I miss them?Why aren’t you questioning why the government and regulators ave allowed them to continue in business?”
All banks have a duty to comply with the law so far as money laundering are concerned and freeze accounts if they are concerned where money has come from albeit mistakes are made by any bank. In actual fact I think I have posted where bank bosses should have prosecuted staff for their failings and if I haven’t made it clear I have now. I would have prosecuted some of previous bank directors for their reckless conduct prior to the last financial crisis of 2008.
3.”Do you think central bankers creating billions and trillions of currency units at the click of a mouse and buying their own government bonds and indirectly monetising their spending is causing instability? If so why aren’t you criticicising it?”
To be blunt yes and I indicated that in todays post, by saying the financial system was already unstable.
I also think UK interest rates will need to fall to zero at the BOE meeting at the end of this month and BOE member Silvana Tenreyo has stated she is in favour of negative rates:
https://www.theguardian.com/business/2021/jan/11/cut-uk-interest-rate-below-zero-to-aid-growth-bank-england-policymaker
What is this guarantee that comes with a £50note?
A £50 note used to be a certificate. A guarantee for 50 lbs sterling silver. That was watered down and removed over the years till just the name, “50 pounds sterling”, remains.
Like all government fiats the currency is backed by nothing more than the trust and ignorance of its population. In the dollar’s case, Nixon removed the connection to gold, “temporarily”, in 1974 and since then it’s been the barrel of a gun which has persuaded its use the world over as the petro-dollar.
Rather than currencies, Investors trust anything that Govts. can’t destroy, more.
Agree – hence the rise in house prices. Sometimes having a tangible asset is more important than yield. The old saying – the return of your money is more important than the return on your money.
Great blog as usual, Shaun.
The national Case-Shiller HPI also shows substantial increases in US house prices. The October 2020 annual inflation rate was 8.4%, the highest it has been since March 2014, when it was 8.9%. The usually reliable Zillow Real Estate Research has projected an annual inflation rate of 9.5% for November. For October the largest price increases came from Phoenix (12.7%), Seattle (11.7%) and San Diego (11.6%), as was the case in September. The continuing strength in Seattle and San Diego surprised me, as I had been led to believe that California and Washington State were left-wing hellholes that everyone was fleeing. I suppose one can’t trust everything one hears on Fox News.
Re the US not having an inflation measure that includes housing prices, this is absolutely true since the BLS moved to a rental equivalence approach for the CPI in 1982. This would have changed if the EU had not been so foolish as to nix adding an OOHPI component to the HICP. The US BLS’s strong sense of professionalism would have committed it to matching the new Eurostat methodology and adding an OOHPI component of its own to its experimental HICP for the total US population. So this perverse decision had a negative impact on America as well as Europe. That being said, every country is responsible for its own fate, and it speaks very poorly of the US Fed that in its deliberations on reforming US monetary policy it never even seems to have considered adopting a target inflation indicator that included house prices.
Hi Andrew and thank you
The gap between media hyperbole and reality is the same over in the UK. The media narrative is that people are fleeing London whereas this evening I spotted this.
“The average price for property in London stood at £660,754 in January 2021. This is a rise of 2.00% in the last three months (since October 2020) and rise of 6.29% since 12 months ago. In terms of property types, flats in London sold for an average of £532,056 and terraced houses for £711,659. This is according to the current Zoopla estimates.”
I too have been surprised that there have not been stronger calls in the US for house prices to be in the official inflation series. There is quite a gap between a Rental Equivalance inflation rate of 2.3% and house price growth in the US,
Shaun, it s timely article since we will shortly discover which asset is the preferred haven from a storm. Bitcoin has ease of distribution on its side because it is not physical. Last week there was consensus that stocks have reached a natural high… so it makes sense to diversify – hence the competition.
As CBDC’s are rolled out this year, arguably there is no need for distributed ledgers since a single ledger at the old lady of threadneedle street is all that is required. I can’t see Govt wanting to take digital currencies in tax settlement, they will favour their own surely?
Is gotta be gold I am afraid.. the millenials will learn the hard way.
Paul C.
Hi Paul
I saw your comment earlier about Bitcoin requiring power which made me think of how tight the UK National Grid got at the weekend and of this.
With the Bitcoin price up here ( between $30k and $40k today) central banks will be accelerating their own plans for digital coins as you say.
I am not an economist and find the whole issue of fiat currencies confusing to say the least. I have often pondered on the question of what the position is if I (hypothetically I should say) withdraw £1,000,000 in notes from my bank account and throw them on a fire. I have lost a million pounds. Has anyone gained by my action?
The Bitcoin reminds of the Dutch Tulip Mania of the Seventeenth Century – possibly the first asset bubble – and someone is going to get hurt eventually. Probably the weak.
I can understand the distrust people have in central banks. The Bitcoin has no tangible assets to back it and I wonder why no enterprising body has not issued a digital currency backed by a basket of assets e.g. gold, currencies, oil futures, blue chips etc and issued the digital currency at a premium to the net worth of the assets purchased. A profit would then ensue to the issuer and the portfolio of assets could be altered to meet the exigencies of any future situation.
Am I being naive?